The Tracking Indexes for the Global Economic Recovery (TIGER) featured in the Financial Times have found that the world economy’s pullback from the short but very sharp Covid-19 recession appears in danger of stalling. Growth momentum is weakening across the world, particularly in the world’s two largest economies, the USA and China.
Against the backdrop of concerns about the impact of Delta and newer variants of the coronavirus, supply-side constraints are tightening, and rising inflation is becoming a significant restraint on policy support that could keep growth on track.
The spike in energy prices symbolises the problems created by supply disruptions that could eventually hurt aggregate demand, particularly if central banks are forced to take more aggressive actions to contain inflation. In many countries, particularly the emerging markets and low-income economies, the 2020 recession continues to impact GDP and employment negatively.
The US economy is in some difficulty, with the strength of both domestic demand and the labour market under question. Job growth has been nothing to write home about, and while consumer demand has remained strong, erosions in business and consumer confidence could spell a softening of domestic demand.
The two major spending legislations before the US Congress aim to raise long-term productivity which would boost demand but in doing so put further upward pressure on inflation which, in turn, could lead the Fed down the path of more aggressive tapering.
China’s growth momentum has weakened as the government attempts to tackle long-standing imbalances in the economy while simultaneously dealing with the disruptive effects of an energy shortage and sporadic resurgences of the coronavirus.
Beijing’s squeeze on housing market speculation and focus on deleveraging the sector have dampened activity in real estate, a key contributor to growth. The lack of clarity about China’s intentions towards private enterprise as President Xi Jinping lurches towards the left as part of his ‘common prosperity’ agenda is a major challenge to economic growth.
Nearly all indicators point to a softening of domestic demand in China, which could lead to stimulus measures by the year-end. Meanwhile, European economies continue to struggle against several headwinds. In particular, Germany’s dependence on industrial sector activity and exports makes it vulnerable to supply chain disruptions, the TIGER report points out.
The silver lining, as of now, appears to be India, which seems to have put the worst of the Covid-19 second wave behind it. But, while the Indian economy is expected to post strong growth for the remainder of the current fiscal, the boost in activity from pent-up demand is hitting limits on account of supply disruptions which have been exacerbated by a power shortage.
TIGER authors Aryan Khanna and Eswar Prasad warn that that rising oil import prices could worsen both the fiscal and current account balances. It would be prudent to hold off on the celebrations.